KANSAS CITY LIFE INS CO KCLI
February 15, 2016 - 11:09pm EST by
broncos727
2016 2017
Price: 38.70 EPS 2.75 0
Shares Out. (in M): 10 P/E 14 0
Market Cap (in $M): 375 P/FCF 0 0
Net Debt (in $M): 25 EBIT 0 0
TEV ($): 400 TEV/EBIT 0 0

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  • Small Cap
  • Life Insurance

Description

I would like to recommend Kansas City Life Insurance (KCLI) as a long. You might imagine from the
company’s name that it was involved in life insurance (and annuities) and based in Kansas City. You’d be
right. Indeed, this is a surprisingly boring company at a surprisingly attractive price.
 
A little background. KCLI started in 1895 and is controlled by the Vogel family (insiders own about 69%
of the outstanding stock). They operate in 49 states and Washington DC. They have about $29 billion of
life insrance in force, $3.4 billion in assets, $3.1 billion in liabilities, and about $339 million in equity.
Like most life insurance companies, low rates for the past decade have not been kind, resulting in an
ROE of around 4% today. If/when interest rates rise, ROEs should too (across the sector).
 
Another reason for KCLI’s low ROE is due to the conservative balance sheet. For example, the 25 leading
life insurance companies (Aetna, Allstate, Hartford, Northwestern Mutual, …) have an average of
approximately 105.5% assets to liabilities; KCLI has 111.0%. KCLI is also more liquid than most
competitors, with 72% of liabilities against liquid assets vs. 43% for the 25 leading competitors. Most of
the liquid assets are bonds, with only a small slice of equities.  The company has essentially no debt.
 
After many years of being fully public, the company deregistered with the SEC on December 15 with a
250 for 1 reverse/forward split. Odd lot shareholders were cashed out at $52.50 per share (vs. ~$39
trading price today, approximately two months later). That may seem like a substantial premium, and it
is, but it was in fact a 24% discount to the company’s 9/30/2015 book value of ~$69. Perhaps this
explains why the company was willing to cash out a large number of odd lots, totaling about 8.5% of the
outstanding shares (hrm…).  Before the repurchase the company had no debt, but I believe they had to
borrow against their line to fund the repurchase.
 
Book value is probably now $71 or so, i.e. it is trading today around 55% of book value and at a 26%
discount to where the company was willing to buy back substantial amounts of stock two months ago.
The company has a history of buying back stock over the years at perhaps 2/3 of book value (~$47
today). They also pay a dividend, $1.08, for 2.8% yield. I expect them to continue to buy back stock
over time; to the extent the stock stays at a high discount to book that should advantage remaining
holders.
 
The combination of low (current) ROE and significant discount to book results in a middling P/E of ~14,
not very exciting. Earnings may grow due to three factors: possible increase in interest rates
(someday!); decrease in costs due to no longer being SEC-reporting; and share repurchases at
substantial discounts to book value. There’s also some chance of growth in the actual life insurance
business, although that’s hasn’t happened recently. On the other hand, SEC reporting requirements can
take a lot of management time and attention, so perhaps there’s some hope there as well.
 
One obvious concern when companies deregister is how they will treat outside minority shareholders.
KCLI has joined OTCQX, indicating a desire to communicate on a regular basis and in good quality:
“Kansas City Life Insurance Company is very happy to be a part of OTCQX,” said R. Philip Bixby,
President, Chief Executive Officer and Chairman of the Board of Kansas City Life. “We believe
the robust market offered by OTCQX will provide a transparent, informative and effective
trading platform to promote strong share liquidity for our shareholders.”
 
I think it’s clear that the company is selling well under what a private acquirer would pay for the whole
business, which should be at least book value. Although the Vogel family does not seem to be
interested in monetizing any time soon, such actions are rarely predictable by outsiders, since the key
decision often revolves around internal family dynamics as much or more than the general market.
 
In the meantime, shareholders earn a reasonable dividend, participate in stock buybacks, have a
conservative option on rates increasing, and may enjoy a rerating higher to a more typical 66-75%
discount to book ($47-53, between 21-36% higher). Many mutual funds e.g. Vanguard owned blocks of
shares that they had to sell after the deregistration; since then bears have been out & growling so there
was no bounce after the forced selling. It’s reasonable to hope that when the dust clears some people
will be attracted to the conservative folks in Kansas City selling at a big discount to book.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Mostly just cheap, but may re-rate when the selling pressure comes out and/or when they file a decent OTCQX annual report.  Earnings should go up if rates increase.  Stock buybacks.

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